Home shortages could develop as recovery unfolds

Sooner or later, the economy will rebound, jobs will return and new households will form. When that time comes, however, there might not be enough housing to accommodate all the new family formations.

At a time when millions of foreclosures have flooded the market, and millions more are said to be in the pipeline, talk of a possible housing shortage may seem ludicrous. Nevertheless, as the recovery unfolds and vast numbers of echo boomers begin to enter and reenter the market, there may not be enough roofs to put over their heads.

A housing deficiency isn’t a sure thing, but the potential is certainly there, says David Crowe, chief economist at the National Assn. of Home Builders, who paints a rather ominous scenario in which house and apartment builders won’t be able to keep up with the demand.

Wherever the new households come from — adult children moving out for the first time or leaving the nest a second or third time after returning to Mom and Dad’s to weather the economic storm, roommates uncoupling and going their separate ways or young couples starting families — most of them are typically renters.

Therefore, the multifamily sector is apt to feel the pinch first, if only because it takes so much longer to build apartments than houses. Not that the timeline to build houses isn’t long; it is. But, Crowe says, it tends to be even longer for apartments.

The apartment sector could find itself stretched for other reasons, too. One is that many wannabe owners no longer could qualify for a mortgage. Maybe they’ve lost a job, perhaps their credit is dinged, or maybe they haven’t been able to squirrel away enough cash for a down payment. Whatever the reason, they may be relegated to renter status for longer than normal.

But Crowe believes that “even those who want to buy and can qualify for a loan will be less inclined to buy” in the short term because there’s no longer any guarantee that their investment in a house will appreciate, at least not as it has in years gone by.

The reluctance to buy “won’t take the complete wind out of everyone’s sails,” the economist says, “but it’s one more element in the scheme of things that now has a different flavor to it.”

Shortages could develop in the for-sale sector for multiple reasons, as well. For one thing, builders are having a hard time borrowing the money they need to buy land, develop lots and construct houses, Crowe says. “Home buyers aren’t the only ones who are facing stricter credit requirements.”

In larger markets where the big public builders tend to dominate, the lack of construction financing may not be as much of a problem. Public builders go directly to Wall Street for their funding, whereas small and mid-size local and regional builders most often go hat in hand to local banks.

But big or small, most builders aren’t starting houses today until they either have nothing else to sell or buyers present themselves with an approved mortgage application. “If a builder can get credit today,” Crowe says, “he’s more likely to get it if he has a solid contract from someone who has a mortgage and doesn’t have another house to sell.”

Don’t be fooled by statistics that show housing starts were up in April. The more important benchmark is permits.

A housing start is recorded when a builder sticks a shovel into the ground. Starts were strongly higher in April largely because builders began the push to move buyers who want to take advantage of the federal tax credits into their homes by the June 30 deadline.

A permit, on the other hand, is an OK from the local authorities to erect a house or begin a subdivision. And permits in April were down, not up, which means that builders are not planning for the next batch of houses like they normally would.

Add to that the fact that the inventory of finished but unsold new houses is at the lowest level since 1971 and the shortage scenario takes on even greater credence.

Some inventory is necessary to take care of buyers who, for one reason or another, need to move in right away. Maybe they’ve just been transferred, or perhaps they’re not terribly picky and want to get the buying ordeal out of the way.

It takes from one to five years to gain approval from local regulators to start a new community, depending on the jurisdiction, and five to six months on top of that to build a house. But given current market conditions, there still may be enough time for home builders to get ahead of the curve.

But apartment builders? They “need to start now,” Crowe says, “if their projects are to be ready when the demand is there.”